- Mastercard enables a wide variety of payment capabilities over its multi-rail network among account holders, merchants, financial institutions, businesses, governments, and others.
- The core payment network links issuers and acquirers globally to facilitate the switching of transactions, allowing account holders to use a Mastercard product at millions of acceptance locations worldwide.
- The network facilitates an efficient, safe, and secure means for receiving payments, a convenient, quick, and secure payment method for consumers to access their funds, and a channel for businesses to receive insight through information derived from the network.
- Mastercard enables transactions for its customers through its core payment network in more than 150 currencies and in more than 210 countries and territories.
- The core payment network supports a “four-party” payments network, which includes the account holder, issuer, merchant, and acquirer.
- Mastercard’s role in a typical transaction on its core payment network includes payment security, value-added services, and the enablement of digital payments.
How does a typical transaction through Mastercard work?
- In a typical transaction, an account holder purchases goods or services from a merchant using a Mastercard product. After the transaction is authorized by the issuer, the issuer pays the acquirer an amount equal to the value of the transaction, minus the interchange fee and other applicable fees.
- Interchange fees reflect the value merchants receive from accepting Mastercard products and play a key role in balancing the costs and benefits that consumers and merchants derive. These fees are collected from acquirers and paid to issuers to reimburse the issuers for a portion of the costs incurred.
- The merchant discount rate is established by the acquirer to cover its costs of both participating in the four-party system and providing services to merchants. The rate takes into consideration the amount of the interchange fee which the acquirer generally pays to the issuer.
- Through Mastercard’s core payment network, they enable the routing of a transaction to the issuer for its approval, facilitate the exchange of financial transaction information between issuers and acquirers after a successfully conducted transaction, and settle the transaction by facilitating the exchange of funds between parties via settlement banks chosen by Mastercard and its customers.
- Mastercard’s core payment network switches transactions throughout the world when the merchant country and country of issuance are different (“cross-border transactions”), providing account holders with the ability to use, and merchants to accept, Mastercard products and services across country borders.
- Mastercard guarantees the settlement of many of the transactions from issuers to acquirers to ensure the integrity of its core payment network. However, it does not guarantee payments to merchants by their acquirers or the availability of unspent prepaid account holder account balances.
- Mastercard’s core payment network features a globally integrated structure that provides scale for its issuers, enabling them to expand into regional and global markets. It is based largely on a distributed (peer-to-peer) architecture that enables the network to adapt to the needs of each transaction.
Mastercard’s Core Payment Network:
- Mastercard’s multi-rail network facilitates various payment capabilities between different parties, including account holders, merchants, financial institutions, businesses, and governments.
- This network links issuers (entities that issue Mastercard products) and acquirers (entities that enable merchants to accept Mastercard) globally, allowing transactions to be switched efficiently.
Typical Transaction Process:
- Purchase: An account holder uses a Mastercard product to make a purchase from a merchant.
- Authorization: The transaction details are sent to the issuer for approval.
- Transaction Approval: If approved, the issuer authorizes the transaction amount.
- Payment: The issuer pays the acquirer the transaction amount (minus interchange fee and other fees) to settle the transaction.
Interchange Fees:
- Interchange fees compensate issuers for the costs and risks associated with providing credit, and they play a role in balancing benefits for consumers and merchants.
- These fees are collected from acquirers and paid to issuers to partially cover the costs they incur in the transaction process.
Merchant Discount Rate:
- The acquirer sets the merchant discount rate, which covers the acquirer’s costs for participating in the payment system and offering services to merchants.
- This rate takes into account the interchange fee paid by the acquirer to the issuer.
Settlement and Transaction Routing:
- Mastercard’s network facilitates the routing of transactions to the issuer for approval, exchanges financial information between issuers and acquirers, and settles the transaction by transferring funds between parties through settlement banks.
Cross-Border Transactions:
- The network switches transactions globally, allowing account holders to use Mastercard products and merchants to accept them across country borders.
Guarantee and Network Structure:
- Mastercard guarantees the settlement of many transactions from issuers to acquirers to maintain the integrity of its core payment network.
- The network’s structure is globally integrated and distributed (peer-to-peer) in architecture, allowing adaptability to the needs of each transaction.
Key Takeaways
- In summary, Mastercard’s core payment network enables seamless and secure transactions between account holders, merchants, issuers, and acquirers across the globe.
- It supports payment processing, authorization, settlement, and financial information exchange.
- The network’s structure provides scalability, adaptability, and integrity to ensure efficient payment flows and maintain the trust of customers in the digital payment ecosystem.